Non-income Tax Legislation Across Latin America: an Effective Policy to Raise Revenues?

• Publication year: 2022

Non-Income Tax Legislation Across Latin America: An Effective Policy to Raise Revenues?

Nicolás José Muñiz Arias

NON-INCOME TAX LEGISLATION ACROSS LATIN AMERICA: AN EFFECTIVE POLICY TO RAISE REVENUES?^†

Nicolás José Muñiz Arias^*

ABSTRACT

In the past decades, there has been a proliferation of non-income levies throughout Latin America designed to stimulate collections. Tax administrators favor them for being easier to enforce as compared to traditional taxes on net income, as well as harder to evade.

To make sense of the rather dysfunctional conglomeration of levies, this Article proposes a classification into three broad categories: (1) taxes on revenues; (2) alternative levies on income and assets, whether on a gross or net basis, along with taxes on net equity; and finally (3) transactional-type levies such as stamp taxes, export duties, remittance taxes, and registration assessments, not to mention the wide spectrum of solidarity contributions. Not only are non-income taxes sanctioned at the national or federal level covered, but also those implemented by provincial, state, or municipal governments.

Limitations as to the creditability and deductibility of these diverse levies increase the overall tax burden multinationals frequently face. Constitutional challenges raised by taxpayers, especially those surrounding alternative taxes on assets and temporary contributions, provide insight as to why judges often hold that the principles of fiscal equity and/or taxpayers' economic capacity to pay are violated.

The Article concludes by calling for an overhaul of tax systems in Latin America by abolishing most of the cumbersome and ineffective levies on

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revenues, assets, and wealth. In exchange, policymakers should focus on framing a simpler and more robust national corporate income tax regime with less exemptions, deductions, and credits, which fully embraces the financial capability of taxpayers.

TABLE OF CONTENTS

INTRODUCTION.............................................................................................427

I. HISTORICAL PERSPECTIVE.................................................................429

A. Colonial Era............................................................................. 429
B. Post-Independence Era ............................................................. 432

II. TAXES ON REVENUES ........................................................................436

A. National/Federal Level ............................................................. 436

1. The Brazilian Experience ................................................... 437
2. Other Jurisdictions ............................................................. 439

B. Provincial/State Level .............................................................. 441
C. Municipal Level ........................................................................ 442

1. Brazilian Tax on Services................................................... 442
2. Andean Region ................................................................... 444
3. Central America ................................................................. 444
4. Caribbean Basin................................................................. 445

III. ALTERNATIVE MINIMUM TAXES.......................................................446

A. Background and Features ........................................................ 446
B. Taxes on Income ....................................................................... 449
C. Taxes on Assets ......................................................................... 452

1. Policy and Categories ........................................................ 452
2. Constitutional Challenges .................................................. 454

a. Central America .......................................................... 454
b. Argentina and Mexico ................................................. 456
c. The Peruvian Experience ............................................. 457

D. Taxes on Net Equity.................................................................. 460

IV. TRANSACTIONAL AND TEMPORARY LEVIES......................................463

A. Stamp Taxes .............................................................................. 463
B. Levies on Exports and Imports ................................................. 464
C. Registration Taxes .................................................................... 468
D. Solidarity Contributions ........................................................... 470

1. Taxes on Large Taxpayers.................................................. 470
2. Taxes on Wealth ................................................................. 473

CONCLUSION.................................................................................................479

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INTRODUCTION

Countries throughout Latin America have historically reported relatively low fiscal revenues to gross domestic product (GDP) ratios when compared to other regions of the world, despite widespread enactment of taxes on net income and value-added.¹ According to the World Bank, the Latin American and Caribbean region reported a 13.6% tax revenue to GDP ratio in 2019, as compared to 15.3% for the world and 19.9% for the European Union.² Part of the reason may lie in the prominent role played in the local marketplace by small and medium-sized companies, commonly referred to as pymes in Spanish, that routinely fail to formally register as taxpayers and consequently deprive national and local governments of critical funding. Perhaps a more plausible explanation is connected to the never-ending myriad of non-income assessments continuously embraced by governments across Latin America (irrespective of political ideology) over the past five decades, many of which started as temporary measures.

To make sense of the rather dysfunctional conglomeration of levies, this Article proposes a classification based on three broad categories: (i) taxes on revenues, receipts, or sales; (ii) alternative levies on income and assets, whether on a gross or net basis, along with taxes on net equity; and finally (iii) transactional-type levies such as stamp taxes, export duties, remittance taxes and foreign exchange fees, in addition to registration duties and temporary solidarity contributions. Not only are non-income taxes sanctioned at the national or federal level covered, but also those implemented by provincial or state governments, as well as by municipal authorities. Constitutional challenges brought by taxpayers over the past two decades, especially those revolving around certain minimum taxes on assets and transitory contributions, provide insight as to why judges ultimately affirmed that violations of the principles of fiscal equity and/or taxpayers' economic capacity to pay tax took place.

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Excluded from this analysis are assessments that have gained prominence among government representatives in charge of formulating fiscal policy. These assessments are designed to raise revenues quickly, are relatively easy to administer, and are difficult to evade. These include national taxes on value-added in conjunction with state taxes imposed in Brazil on commerce and services (ICMS);³ excise taxes; payroll taxes with mandatory corporate distributions to fund employee profit sharing (PTU);⁴ real estate taxes; and (ever-present in Latin America) financial transaction taxes;⁵ along with the various income taxes withheld on outbound payments made to non-residents such as dividends, interest, royalties, management fees, and technical services.

Our journey takes us through Mexico and six Central American republics, a selection of Caribbean Island nations, as well as the bulk of the South American continent. This Article examines tax legislation adopted in over twenty different jurisdictions throughout the Americas, primarily during the past four decades.

Legislation enacted in the larger American jurisdictions is examined in great detail. This includes Brazil, not surprisingly, with its multiplicity of levies on revenues and imports at the federal and municipal levels; Peru with its varying taxes on assets that have mutated over time; Colombia with its somewhat inconsistent attempts to raise revenues rapidly by assessing tax on net equity;

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and Argentina with its ever-increasing number of levies on revenues, assets, net worth, exports, and other transactions. Smaller jurisdictions are scrutinized to a lesser extent. These include Costa Rica and Uruguay with their corporate registration duties, and Puerto Rico and Paraguay with their municipal license taxes on gross receipts and adjusted assets, respectively.

I. HISTORICAL PERSPECTIVE

The famous nineteenth-century Danish philosopher, S0ren Kierkegaard, once wrote that "life must be understood backwards; but ... it must be lived forwards."⁶ The same can perhaps be said as it pertains to tax legislation. Let us therefore begin our journey, back in time, on the island nation of Cuba. This Article will explore which types of levies were most prevalent for nearly four centuries under European domination, through the first six decades of the twentieth century in an independent republic, right up to the socialist-inspired revolution led by Fidel Castro that continues to this day. The Cuban experience associated with the evolution of tax legislation reflects, to a large degree, what was occurring elsewhere in the Americas.

A. Colonial Era

Non-income levies have been present in the Americas ever since the dawn of the Spanish and Portuguese empires in the early sixteenth century. Tax policy back then was aimed primarily at extracting as much revenue as possible from the colonies. Some of the first levies enforced within the vast confines of Spanish colonial rule include: the avería, assessed on the value of goods transported between the mainland and its colonies to fund the costs of...